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Templeton Africa for a niche market

Franklin Templeton Investment Funds -Templeton Africa Fund

Type: Sicav

Aim: Growth by investing in the equities and equity-related securities of companies listed in the Middle East and North Africa or those based elsewhere but have their main business activities in Africa

Minimum investment: $5,000 or currency equivalent

Investment split: 67.22% equities, 32.78% cash/cash equivalents

Place of registration: Luxemburg

Charges: Initial up to 5.75%, up to 3% for N shares, annual 1.6% plus up to 0.5% maintenance charge for A and AX shares, up to 0.75% for class B shares, up to 1.08% for class C shares, up to 1% for class N shares

Commission: Subject to negotiation

Tel: 020 7073 8600

The Templeton Africa Fund is the latest addition to Franklin Templeton Investments’ Luxemburg Sicav range. The fund aims for growth by investing in equities in the Middle East and North Africa and in companies elsewhere with their main business in the African region.

The portfolio will be diversified across countries and sectors, enabling the fund to benefit from rising demand for the region’s natural resources and a growing consumer market underpinned by the emergence of a new middle class.

The firm believes that some of the characteristics observed in economies such as China and India decades ago are present in a number of African economies.Itbelieves UK investors are showing considerable appetite for frontier markets, which are among the fast growing economies of the world. It expects the new fund will appeal to such investors as it provides access to African markets through an open-ended fund with a sterling share class.

Discussing how the fund could be useful to advisers and their clients, Capital Trust Financial Management partner Bruce MacFarlane says: “The Templeton Africa Fund provides IFAs and their clients with an exciting opportunity to gain access to one of the last true remaining emerging/frontier markets.”

MacFarlane feels that although many advisors and investors would avoid investing in Africa due to the higher risk and political instability it undoubtedly has, few might realise that the African economies have ranked among the most resilient since the start of the global economic recession.  “Indeed, economic growth across the 54 countries of the African continent will hover around 6 per cent in 2012 according to the International Monetary Fund, positioning it to become the second fastest growing region in the world,” says MacFarlane.

Assessing the investment case for investing in Africa, MacFarlane says: “Africa has a young and fast growing middle class estimated to comprise of over 300 million people and the significant increase in their spending power will help drive economic expansion in the region.  According to the business and economics research firm McKinsey Global Institute, consumer spending across the continent will be in excess of $1 trillion in 2012.”

MacFarlane believes that Africa has undoubtedly benefited over recent years from the increased global demand for commodities and feels that as the demand for hard and soft commodities continues to grow, Africa will remain in an enviable position due its vast natural resources.

“The new fund will be managed by Dr Mark Mobius and his team, who have a highly respected and enviable track record in the emerging markets,” says MacFarlane. Templeton emerging markets group executive chairman Dr. Mark Mobius has spent more than 40 years working in emerging markets and joined Franklin Templeton in 1987. He runs 11 other funds for Franklin Templeton, including the Templeton frontier markets and Templeton Asian smaller companies funds.

Assessing the charges of the new fund, MacFarlane feels they are in line with similar funds in this sector.

Turning to the potential drawbacks of the fund, MacFarlane feels there is little to dislike about this particular product. “For those who wish to access the African economic growth story, this fund should provide a well-managed and cost effective way to gain exposure,” he says.

Having said that, MacFarlane adds that the Templeton Africa fund is not the first to venture into the African markets. He points out that there have been some high profile failures such as the New Star Heart of Africa Fund,  launched in 2007. MacFarlane recalls that this fund was shut by New Star after less than 18 months due to liquidity problems.  “I would expect Dr Mobius and his team will have put in place measures to avoid such problems with their funds,” says MacFarlane.

Franklin Templeton concedes that equity markets are relatively small and illiquid outside South Africa, with the regulation of shareholder rights often incomplete and political instability a potential threat. But it says the situation is changing, as in Nigeria where banking reform has led to the creation of well-managed and well-financed banks at attractive valuations.

The company also thinks African economies are likely to benefit from investment by bigger emerging markets such as China, India and Brazil in infrastructure projects such as roads, bridges, schools and hospitals. The firm feels this helps to reduce the risks of investing in Africa that advisers may be concerned about.

Identifying products that could compete with Templeton Africa, MacFarlane says: “There are only a few investment products that provide investors with a means of getting access to the African growth story, so the Templeton Africa Fund is fairly unique in this respect.  There are, however, a number of exchange traded funds and some Mena – Middle East North Africa – frontier funds available to the more sophisticated investor, which provide access to these markets.”

Summing up, MacFarlane says: “The Templeton emerging markets team have been investing in Africa for close to 20 years and have in excess of $256 million invested in African equities.  With a research office in Johannesburg the team follows a strict bottom up stock selection process when building their portfolio. “

However, MacFarlane feels that ultimately this fund should be considered as a niche market product.

BROKER RATINGS

Suitability to market: Good

Investment strategy: Good

Charges: Average

Adviser remuneration: Average

Overall 8/10

Recommended

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